Creating a Retirement Paycheck

Transitioning from your working years to your retirement years can be difficult to manage. Understanding how to replace your income is vital in order to manage your finances in retirement. Understanding how to make this transition away from a paycheck can make the adjustment easier. 

Typical sources of income during working years include the following:

  • Wages
  • Commissions
  • Self-employment income
  • Bonuses
  • Rental income
  • Other

With income from your job, you generally know when to expect funds in your bank account, whether you are paid monthly, weekly, biweekly, or in some other way. You also generally have taxes automatically withheld from your income. Can you do the same in retirement?

Typical sources of income during retirement include the following:

  • Investment income
  • Social Security
  • Rental income
  • Pension income
  • Other

First, you should determine your budget in retirement. Using a budgeting sheet can help you line item your budget. It’s important to note that your retirement expenses will likely differ from your pre-retirement expenses. While you may have paid off your mortgage, for instance, your healthcare costs are likely to rise. Once you have a good idea of what your total monthly need will be, the next step is to determine where the funds will come from.

By taking your monthly total required income in retirement (determined by your budget) and subtracting any fixed sources of monthly retirement income you may have (such as Social Security, pension income, annuity payments, etc.), this will indicate how much money will need to be sourced from your investment accounts. 

Next, you’ll need to determine where those additional assets should be drawn from.

Common account types include the following:

  • IRAs
  • Roth IRAs
  • 401(k)s
  • After-tax accounts (joint, individual, trust)
  • Other employer plans

Choosing which accounts to take funds from, and in what order, is dependent on your personal situation. If you’re working with an experienced financial advisor and his or her team, you can rely on them to help you through this process. 

Once you’ve determined where the funds are coming from, you can set up regular payments (just like a paycheck). This is generally called an automated clearing house (ACH), and it’s a way to electronically transfer funds. You have choices as to the amount, frequency of payments, and tax withholding (if the funds are coming from a pre-tax account). 

It’s important to note that all withheld taxes will be shown on form 1099-R, which you will receive from your custodian at year-end. 

With the ability to set up multiple regular transfers and adjust the various factors at any time, you are essentially replacing your paychecks with regular payouts from your investments. But the biggest question may be this: will you have enough to sustain yourself throughout retirement?

And don’t forget to consider these other important factors:

  • Make sure to withdraw your required minimum distribution (RMD) amount if you’re over age 72—if you don’t, you could be penalized up to 50% of the amount of your RMD. 
  • You cannot take withdrawals from your IRA or Roth IRA before age 59 ½ without penalties.
  • If you retire before age 59 ½ but are at least age 55, you can begin withdrawals from company plans without penalties.

Financial planning can help to answer many of the questions outlined above, and, more importantly, it can also help ensure that you are able to successfully achieve your financial goals. If you’re not already working with a financial advisor, consider making Reilly Financial Advisors your trusted financial partner. 


Download Our Free Guide

This free guide is designed to teach you about using an employer-sponsored retirement plan in order to create recurring income in retirement.

Among other things, this guide will cover…
• Understanding your 401(k) or other employer-sponsored plan and why it’s so important to take advantage of any employer match
• Differences between your options for underlying investments
• Costs and fees that may be associated with your plan (as all plans are not created, or billed, equally)

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